What we’ll cover
- The definition of a term deposit
- Interest earned
- Benefits of term deposits
- Downsides of term deposits
- Choice of terms
- Receiving interest payments
- Minimum and maximum investments
- Options at maturity
- Suitability for investors
- Opening a term deposit account online.
What is a term deposit?
When you open a term deposit account, your money is invested at an agreed fixed interest rate for a fixed period of time (the ‘term’). That means, once you’ve put your money into a term deposit, you won’t be able to access it until the end of the term (other than in special circ*mstances).
In return, you’ll get a guaranteed interest rate for the length of the term, so you’ll know exactly what the return on your investment will be.
How much interest will I earn with a term deposit account?
The amount of interest a term deposit earns depends on a number of factors such as the term selected, the amount being invested and whether interest is paid during the term or at maturity.
What are the benefits of a term deposit?
With a term deposit you will be offered a fixed interest rate, which means you’ll know exactly what your investment will earn. And, if market conditions change and interest rates drop, you’ll still benefit from the interest rate you selected at the time you took out your Term Deposit.
Another benefit of putting money into a term deposit (with Westpac at least) is that there aren’t any set up or monthly account fees.
Term deposits are generally considered a safe investment, as they don’t have the volatility of other investments such as property and shares. Additionally, if you take out a term deposit at an authorised deposit taking institution in Australia (such as Westpac), your term deposit is guaranteed by the Australian Government under its Financial Claims Scheme, up to a maximum deposit of $250,000.
Term deposits can be an ideal way to save money, as you won’t be able to touch your savings for the length of the agreed term. In other words, term deposits can take the work out of resisting the temptation to dip into your savings – and you’ll be earning interest while you're being patient.
Are there any downsides of a term deposit?
Perhaps the main downside with a term deposit is the barrier to getting to your money during the term selected. Although there are special circ*mstances when you can access your money early, you’ll generally have to pay an early withdrawal fee or be subject to an interest adjustment. Furthermore, you’ll likely have to give up to 31 days’ notice.
So, before opening a term deposit account, it’s important you carefully consider whether you’ll need access to your funds during the length of its term.
Secondly, changes in interest rates can sometimes go against you. Should interest rates rise once you’ve locked your money into a term deposit, you won’t be able to benefit from the change in rates. The flipside, of course, being that should interest rates fall, you’ll still get the rate you fixed at the time of the investment period.
What terms can I choose to get the fixed interest rate?
The length of time you can lock your money away in a term deposit can vary from as short as one month through to five years.
Term deposits are often divided into short- and long-term deposits:
- Short-term deposits are generally categorised as anything from one month to one year. You might want to consider a shorter length if you have a savings goal in mind (such as going away on a trip in the near future) and don’t want to lock your money away for a long time, while also removing the temptation to dip into your savings.
- Long-term deposits could be anything over 12 months (generally up to 5 years).
How do I receive interest payments?
With most term deposits you’ll be given interest payment options, choosing to have the interest paid annually, half-yearly, monthly, or on the maturity date (the technical term for when the term ends).For investments longer than 12 months, interest will need to be paid at least annually. The frequency you want to have interest paid may impact the interest rate offered.
Is there a minimum deposit or maximum investment?
Most financial institutions require a minimum investment into a term deposit, which in Westpac's case is $5,000. Depending on the term selected and the applicable interest rate offered (which may include a bonus for online opening), maximum deposits for Westpac term deposits range from $2,000,000 to $5,000,000 depending on the terms and other market conditions.
What happens at the end of the term?
When your term deposit matures, you can reinvest it into a new term deposit at the prevailing interest rate (with or without the interest earned), reinvest a different amount by either adding funds or taking some funds out, or have the money deposited back to you via your nominated bank account.
Is a term deposit right for me?
As with all investments, it’s important to think about your own situation.
With a term deposit, here are some factors to consider, noting that it’s always best to seek independent financial advice before making any firm decisions on your financial future:
- What are your short- and long-term financial goals? Do you have a specific goal in mind such as saving for a home deposit, a car or a holiday, or do you want to earn an income from the interest you’ll earn (such as having a term deposit as part of a self-managed super fund)? These factors will also influence what term would be appropriate for your needs.
- Are you a disciplined saver? If you’ve got money put away in a savings account or have come into some cash (a work bonus or tax return refund, for example), a term deposit could be a form of ‘forced saving’, as you won’t be able to access the money until the end of the term. On the flipside though, you’ll have to be sure you won’t need to access the money.
- What are interest rates like? Depending on market conditions, interest rates may be relatively higher or lower when compared to other savings products. If interest rates are up, you could benefit from locking in a favourable interest rate. Once you’ve selected a term though, you won’t be able to benefit should interest rates go even higher as the rate is locked in.
How easy is it to open a term deposit?
Once you’ve selected the term and the amount you want to put away, setting up a term deposit can be as simple as applying online in minutes (if you're already an online customer).
You can open a term deposit online if you’re already a Westpac customer, and there’s no need to head into a branch. You only need to go into a branch if you want to open a joint term deposit account or if you’re opening as a self-managed super fund or trust.
Things to have handy are your everyday bank account details for depositing term deposit funds at the end of the term, your tax file number (if we don't have it on file already), and confirmation of your Australian residential address.
In summary
Fixed term deposits may be a good savings account option if you want a low-risk investment and are happy to earn a fixed interest rate over a fixed investment term without access to your funds. Depending on the term, you can choose to receive interest monthly, twice yearly, annually or at maturity.
